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Letter to the Editor

Earl Scheib Q3 Sales Down 9%

Net sales for the third quarter of fiscal 2003 were $9,290,000, a decrease of 8.9 percent from the third quarter of fiscal 2002 net sales of $10,202,000. The decrease in net sales resulted primarily from the company operating a weighted-average 10 fewer retail paint and body shops during the quarter ended January 31, 2003 (pursuant to the planned restructuring of the retail paint and body business), as compared to the quarter ended January 31, 2002, and a 3.1 percent decrease in same-shop (shops still open one year or more) retail paint sales. Specifically, the company's 49 East and Midwest division shops experienced a same-shop sales decrease of 13.5 percent because of severe winter weather; but the 77 Western division shops that are located in comparatively weather-friendly areas had a same-shop sales increase of two percent. For the nine months ended January 31, 2003, net sales (with a weighted-average 19 fewer shops) were $35,115,000, as compared to $38,752,000 for the nine months ended January 31, 2002, a decrease of 9.4 percent. During the first nine months of the current fiscal year, same-shop retail paint sales were essentially flat and the combined sales in the fleet and truck center and commercial coatings operations increased by $158,000 from the comparable period in the prior fiscal year.

The operating loss for the third quarter of fiscal 2003 and fiscal 2002 was $2,192,000 and $1,571,000, respectively. The greater operating loss in the third quarter of the current fiscal year from the third quarter in the prior fiscal year was primarily attributable to the adverse effect of the decrease in the same-shop retail paint sales and increased insurance, legal and professional expenses of $596,000. The operating loss of $2,824,000 for the nine months ended January 31, 2003 was greater than the prior fiscal year loss of $2,089,000 primarily due to increased insurance and professional expenses of $662,000.

During the first nine months of fiscal 2003, the Company sold four parcels of real estate and disposed of other fixed assets for a pretax gain of $1,479,000. During the first nine months of fiscal 2002, the Company sold 13 parcels of real estate (including its corporate office building) and disposed of other fixed assets for a pretax gain of $3,561,000.

During the third quarter of fiscal 2003, the company recorded interest income of $164,000 on refunds of federal income taxes paid for fiscal years 1999 and 1998. In addition, the Company recorded a benefit of $425,000 for the excess of previously accrued interest expense over that required at February 24, 2003 by the Internal Revenue Service ("IRS"). As disclosed in previous annual and quarterly reports, the accrued interest relates to a protest regarding the disallowance by the IRS of a net operating loss carryback refund received during fiscal 1997.

The net loss for the third quarter of fiscal 2003 was $1,578,000, or $0.36 per diluted share, as compared to a net loss of $778,000, or $0.18 per diluted share, for the third quarter of fiscal 2002. For the nine months ended January 31, 2003, the net loss was $1,183,000, or $0.27 per diluted share, as compared to net income of $734,000 for the nine months ended January 31, 2002, or earnings of $0.17 per diluted share. The company recorded a benefit in the third quarter of fiscal 2003 for federal income taxes provided during the first two quarters, but did not recognize any federal or state income tax benefit for the pretax loss incurred in the first nine months of fiscal 2003.

Chris Bement, Chief Executive Officer and President, commented, "Though we have experienced success in the closing of retail paint and body shops under our restructuring plan, the harsh winter weather in the East and Midwest, coupled with increasing insurance costs in primarily workers compensation and group medical, significantly impacted our operating results in the third quarter. These weather conditions continue into the fourth quarter and the rising costs of insurance, particularly in California, appear to be ongoing. In addition, the regulatory requirements of a publicly-traded entity and the managing of multi-state retail operations result in increasing administrative costs and professional fees that substantially offset cost savings in other areas.

"However, despite these and other factors, the Board of Directors and senior management are committed to seek the means and alternatives to increase the total enterprise value of the Company."

Earl Scheib, Inc., founded in 1937, is a nationwide operator of 126 auto paint and body shops located in more than 100 cities throughout the United States.

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